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Forex VS Options

Published by Usman Ahmed, MBA (Researcher)

Reviewed by Bowen Khong, ACCA

Forex involves the exchange of foreign currencies at a market rate in an over-the-counter market to make profits. Whereas option trading is a type of contract whereby both parties agree to the right to sell or buy an underlying security at a predefined price in the future.

Not to mention, options trading is not an obligation, rather involved parties have the right to have the right to buy. As to which is the best depend upon personal choices, style of trading, and risk appetite.

You also need to consider various factors, such as liquidity, available leverage, trading hours, cost of trading, and volatility before making a final choice. Let’s take a look at some of the key differences between forex and options.

Liquidity:

Forex

Since the forex market is one of the most liquid markets in the world, you can buy or sell off your securities at ease. The forex market becomes even more liquid when two trading sessions overlap. During the overlapping sessions, there are vast numbers of traders available to fill up your positions.

Options

On the other hand, liquidity in the options market is significantly lower than the forex market. Depending upon the option you wish to trade, there could be only a few traders available.

Trading Hours:

Forex

Forex investors can trade round the clock since the forex market remains open 24/5. The forex market runs in four trading sessions across the globe, including Sydney, New York, London, and Tokyo. Traders have ample time to find the best trading opportunities to open and close their positions. Since the forex market is accessible all the time, so price gaps are rare.

Options

Options trading, more specifically stock options being interlinked with the stock market comes with limited trading hours. Investors have to trade between 9:00 AM (EST) to 4:30 PM (EST) from Monday to Friday. The price of the options tends to freeze after the market is closed. 

However, news that can make an impact on the price of options continues to roll out. At the start of the next trading day, the price of options may exhibit a sudden change either positive or negative in response to the market news released during the dead hours. 

The dilemma is that option price might jump over the automated stops in place.

Leverage:

Leverage is a crucial factor to make substantial profits with both forex and options trading. Leverage enables traders to control large positions with limited capital investment. However, one must always remain cautious as leverage also magnifies the risk of loss.

Forex

Leverage available to trade forex can be as high as 1:500. However, regulated brokers tend to offer a leverage of not more than 1:30.

Options

Available leverage for options trading can be lower as compared to forex trading.

Commission:

Forex

Usually, most forex brokers don’t charge any commission on currency trading. Instead, they make money through spread markups. The cost of spreads is negligible as compared to a premium or commission charged by brokers in other financial markets.

Options

On the other hand, the cost of options trading can be more significant than forex trading. For instance, a stock option usually consists of 100 shares of the underlying security. Traders pay a commission to buy each contract. For example, if a broker charges a commission of 25 cents per contract, buying an option could cost traders to pay 0.25 x 100 = $25.

Final Words

Forex and options trading have distinct features as well as pros, and cons.

Both assets can help traders make substantial profits if traded with due care. While considering between the two, let’s not forget to consider your trading style, and risk tolerance approach. 

It is generally believed that forex trading has more profit-making potential than options trading. Furthermore, higher liquidity, increased leverage, extended trading hours, and low trading cost makes forex trading a better option to consider.

Forex VS Options

Forex involves the exchange of foreign currencies at a market rate in an over-the-counter market to make profits. Whereas option trading is a type of contract whereby both parties agree to the right to sell or buy an underlying security at a predefined price in the future.

Not to mention, options trading is not an obligation, rather involved parties have the right to have the right to buy. As to which is the best depend upon personal choices, style of trading, and risk appetite.

You also need to consider various factors, such as liquidity, available leverage, trading hours, cost of trading, and volatility before making a final choice. Let’s take a look at some of the key differences between forex and options.

Usman Ahmed, MBA (Researcher)
Usman Ahmed, MBA (Researcher)
Usman Ahmed is a currency trader and financial market analyst with more than 7 years of active trading experience. Besides holding a Masters degree in Business Administration, he has worked for some of the most renewed companies in the forex industry including FXCM, IQOption, MetaQuotes, Alpari, FXStreet, DailyFX and several others. Usman possesses strong technical analytical skills and is famous for his very own, informative and entertaining, writing style. He believes in naked chart trading analysis that is commonly known as price action trading. He follows global financial news and macro-economic events very closely.
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